Most Home Service Businesses Are Leaving Half Their Profit on the Table
There’s a number Matthew Mooney and Raymond Gong repeat with almost clinical consistency: 20%. That’s the net margin benchmark they believe every well-run home service business should be hitting. The uncomfortable reality, based on the hundreds of companies they’ve reviewed, is that most businesses are actually running at 5 to 12%.
Mooney and Gong are co-founders of Profitability Partners, a fractional CFO firm built specifically for HVAC, plumbing, electrical, and roofing businesses, with both men coming directly out of the private equity world, including time on Apex Service Partners’ M&A team. They joined Tersh Blissett and Josh Crouch on the Service Business Mastery podcast to break down exactly where that missing profit typically hides, and the specific benchmarks by trade that determine whether a business is actually healthy or just busy.
This article covers the home service profit margin benchmarks Mooney and Gong shared, the most common accounting mistakes that quietly wreck a P&L, and why fixing this now matters even more if an exit is somewhere in a business owner’s future.
Why This Matters Right Now
Private equity firms are actively rolling up home service businesses at increasingly high valuations, and Mooney’s own background on the buying side gives a rare, direct look at exactly what those firms look for before making an offer. The math is unforgiving: buyers work line by line through a target company’s P&L, comparing it against a proprietary set of industry benchmarks, and any gap between a business’s actual performance and that benchmark becomes leverage in a negotiation, or a number that gets quietly built into a lower purchase price.
Whether or not a sale is on the horizon, the same benchmarks apply to running a healthier business today. Gong put it directly: for nearly every problem a home service business runs into, someone else in the industry has already solved it, because these businesses are, structurally, the same business model repeated across different markets.
Core Insight #1: The Real Gross Profit Benchmarks by Trade
Bite-size takeaways:
- On a blended basis across service and install, home service businesses should be targeting roughly 50% gross profit.
- HVAC tends to run slightly lower than other trades due to heavy material costs and equipment-heavy install work. Within HVAC specifically, install work typically runs closer to 40% GP, while service work runs closer to 60% GP.
- Plumbing generally lands in the middle, with companies commonly running 55% to 60% GP, reflecting somewhat lighter material costs than HVAC.
- Electrical is typically the lightest on materials and the most labor-focused, with strong electrical companies running in the mid-60s up to 70% GP.
- For the fully detailed numbers by trade, Profitability Partners has published dedicated benchmark breakdowns: HVAC profit margin benchmarks and plumbing profit margin benchmarks.
The single biggest distortion Mooney flagged: most businesses aren’t using a fully loaded labor rate when calculating gross profit. That means technician commissions get counted, but payroll taxes, benefits, and 401(k) matches often get pushed below the gross profit line into overhead instead. A business owner might believe they’re running a healthy 52% GP, when the true, fully loaded number is actually below 40%, simply because part of the real labor cost was hiding in the wrong section of the P&L.
Core Insight #2: Pricing Mistakes That Quietly Destroy Margin
Real example from the episode: Blissett described interviewing a comfort advisor candidate who asked, without hesitation, for a “discounted price book,” explaining that he discounted on every single job he sold. Blissett’s response was to end the interview on the spot, and Mooney and Gong confirmed this instinct is correct: reliance on discounting is one of the clearest signs of a margin problem hiding in a business.
Industry implications:
- Discounting is far more expensive than most owners realize. If a business runs a 50% GP and offers a 10% discount, that discount doesn’t just cost 10%, it can reduce gross profit by roughly 20%, since material costs stay fixed regardless of the discount.
- Mooney and Gong’s counterintuitive recommendation: businesses are often better off letting a price-sensitive lead walk away entirely and spending a small additional percentage on marketing, rather than routinely discounting to close deals. A couple of extra percentage points in ad spend is a far smaller hit than the margin lost to habitual discounting.
- The standard marketing spend benchmark cited is around 10% of top-line revenue, though highly competitive markets can justify up to 15%, and businesses can still hit strong net margins at that higher spend level if the rest of the operation is dialed in.
- Membership and maintenance plan discounts create a similar trap when they’re layered on top of an already-incorrect base labor rate. The fix both hosts and guests referenced: build in a 15-20% markup specifically so the “discounted” membership rate still lands at the true price needed to hit a 20% margin, a concept previously discussed on the show by Billy Stevens.
- Commission-based pay structures were highlighted as a strong lever for both morale and margin predictability. When a technician sells a $1,000 job, the labor cost on that job is largely known in advance, unlike hourly pay structures where a job estimated at two hours can balloon to six, quietly wrecking margin across every technician doing similar work.
Core Insight #3: Why Fixing Margin Now Pays Off Even More at Exit
Mooney and Gong closed with a specific case study: a client went through every single transaction in one month of their books, reviewing every role in the company to determine what was actually necessary to run the business. That level of detail typically uncovers at least a few percentage points of unnecessary overhead in most companies.
The math that makes this urgent:
- A 3% overhead improvement on a business running 5% net margin represents a 60% increase in total profit, purely from cutting unnecessary costs.
- If that same business is later sold at a private equity multiple of 8x to 12x EBITDA, even a modest $200,000 reduction in annual expenses can translate into an additional $2 million or more at the time of sale.
- Gong estimated that more than 80% of contractors are sitting on this kind of unrealized value inside their existing business, whether or not they plan to sell.
- The same multiplicative effect applies across the front end of the business: a 5% improvement in booking rate, a 5% improvement in technician close rate, and a 5% improvement in average ticket don’t just add up to 15%, they compound, since each metric multiplies against the others.
Conclusion
The gap between a 5-12% company and a 20% company rarely comes down to one dramatic fix. It’s usually a combination of a mislabeled labor cost, a habit of discounting instead of holding price, an overhead line that quietly crept upward, and a lack of real visibility into which numbers actually matter. Mooney and Gong’s core message is that these are solvable, well-documented problems, not mysterious ones, and the businesses winning right now are the ones treating their P&L with the same discipline they’d expect from a technician’s diagnostic checklist.
Whether an exit is five years away or never on the table at all, hitting a real, fully loaded 20% net margin isn’t just a valuation exercise. It’s the difference between a business that generates genuine cash and one that just looks busy on paper.
FAQs
What is a good net profit margin for a home service business? Profitability Partners recommends targeting roughly 20% net margin as a benchmark for a well-run home service business, though most companies in the industry currently operate between 5% and 12%.
What gross profit percentage should HVAC, plumbing, and electrical companies target? On a blended basis, home service businesses should aim for around 50% gross profit. HVAC tends to run slightly lower due to heavy material costs, plumbing typically runs 55-60%, and electrical companies can reach the mid-60s to 70% given lighter material costs.
Why does “fully loaded” labor cost matter for calculating gross profit? Many businesses only count base wages and commissions in their labor cost, leaving payroll taxes, benefits, and 401(k) matches classified as overhead instead. This can make gross profit look significantly healthier than it actually is.
Is discounting bad for a home service business’s margin? Frequent discounting can be more damaging than it appears. Because material costs stay fixed, a 10% discount on a job with 50% gross profit can reduce that job’s actual profit by roughly 20%, making habitual discounting one of the more expensive pricing mistakes a business can make.
How much should a home service business spend on marketing? A commonly cited benchmark is around 10% of top-line revenue, though businesses in highly competitive markets may need to spend closer to 15% while still maintaining strong net margins, provided the rest of the business’s booking and conversion metrics are solid.
How does improving profit margin affect a business’s sale price? Because private equity buyers typically pay a multiple of EBITDA (often 8x to 12x in this industry), even modest overhead reductions can translate into a significantly larger payout at the time of sale, making margin improvement valuable regardless of whether an exit is imminent.
